Designing Business Units: Efficiency Implications of Geographical and Functional Scope in a Global Value Chain’s Footprint

We examine the effects that agglomeration and dispersion in a firm’s value chain have on the efficiency attained by its foreign production units. By drawing on the resource-based view and the transaction cost economics lenses, we identify three effects of dispersion and disaggregation in the efficiency attained by the foreign production unit: 1) geographic scope effects, which reduce efficiency when disaggregated activities are related; 2) functional scope effects, which increase efficiency, the larger the concentration of related functions in a given location; and 3) ownership effects, which moderate the geographic and functional effects on configurations that draw on the use of outsourced activities. We test these interrelations using a dataset of administrative and technical projects offshored between 1995 and 2012. Overall, we find moderate support for geographic effects and strong support for functional, and ownership mode effects. Our study suggests that agglomeration of related activities tends to benefit firms developing fully owned foreign units whereas locational specialization benefits firms adopting outsourced offshoring.